The other day reader Mike M asked in our comments section:
Hi Lee -What do you think of this Powell fellow as Fed Chair? It appears from an article I read that he is fond of the TBTF bailout.
Mike, you are not the only one to ask me this question. In fact, people right here at Money Map Press have been asking me. No doubt, the entire world wants to know. CNBC talking heads talk about it. The Wall Street Journal and Bloomberg and Reuters have probably written great tomes about it.
When asked a question to which everyone wants an answer, I always give it great thought. And I always think about the Fed chair, no matter who he or she is.
I usually end up not thinking much of them, Bernanke especially. He destroyed the lives of millions of senior citizens by taking away the interest income they depended on to supplement their social security. I despised Bernanke for that alone, not to mention the massive money printing that benefitted only the bankers and speculators. Yellen I liked better. Other Fed critics, including some who are my friends, may still skewer her. I give her credit for stopping the madness.
Now here’s what I know, and what is most important for you to know about Jerome Powell. They call him Jay. Other than that, nothing. That’s right, nothing.
I’m going to tell you why, and what you do need to know.
We’re here as investors. We’re not policy makers. We’re not economists. Our only concern is which direction is the stock market headed. And our concern should not be where it might be headed 6 months or a year or 6 years from now.
We need to get the current trend right. We need to stay focused purely on the question of what the current trend is, and whether there’s a transition under way.
If we don’t get that right, it absolutely won’t matter what we know about likely future Fed policy.
Wall Street and its media handmaidens want us to take our eye off the ball. The Street only wants to stick its grubby fingers in our pockets and regularly skim just enough of our hard earned capital to stay fat and happy, but not too much that we leave their game.
So they disseminate all kinds of stories designed to take our attention away from our job, which is to preserve and grow our capital. To do that, we need only two rules. Rule number one is of course, “Don’t fight the Fed.” It’s not, “Don’t fight the Fed” in 6 months or a year. It’s “Don’t fight the Fed right now.” Rule number 2 is, “The trend is your friend.” Knowing the trend requires both following the Fed, and a little technical analysis.
It does not include a bio of the next Fed chair.
At The Fed, People Are Irrelevant, but Policy Is Everything
Look, everybody knew before he came to the Fed that Ben Bernanke was a money printer. His high school social studies term paper on the idea that the Fed caused the Great Depression with its supposed tight money policies was famous.
Or maybe he wrote it when he was an absent-minded professor at MIT, a school famous for turning out economic “geniuses” who become policy makers. It is one of the great theological seminaries of Economism, the great polytheistic religion of the policy maker priesthood.
Bernanke also had given his famous sermon on helicopter money and printing presses in the basement, before he became Fed chair. His theological treatise and sermon are what got him appointed as high priest of the Fed.
What difference did that make? He came into the Fed and continued the super gradual tightening that had been instituted by the previous Fed Chair, Saint Alan Greenspan. Wall Street and the media had anointed Greenspan a god. He was The Maestro. Greenspan had been raising the Fed Funds rate since 2004. He had even slowed the growth of the Fed’s balance sheet a tad.
That’s what Cardinal Bernanke inherited when he ascended to the papacy. He came in with the Fed tightening, and he continued to tighten. That was the church dogma of the day, and he followed it.
So what did Helicopter Ben do when he ascended to the Fed throne? He kept doing what Greenspan had been doing, raising interest rates and growing the Fed balance sheet at about the same steady 5% growth rate as Greenspan had been following in 2005.
In short, Pope Helicopter Ben followed the exact same policies of Pope Alan the Maestro. Fed policy changes are like papal encyclicals. Regardless of how radical or conservative a new Pope may be, they don’t change Church teachings for a long time.
And you never know when a Fed Chair may go off script of their past histories. I harken back to Bernanke’s reputation as a money printer. He did allow the Fed’s balance sheet to continue to grow after his ascension to the throne in January 2006. But he followed Greenspan’s course of gradual increases in the Fed Funds rate until July 2006, 6 months into his term, giving Greenspan’s policy its proper respect.
He stopped those rate increases in July 2006. But then in 2007 in a move that was completely out of character for him, he slammed the brakes on Fed balance sheet growth. I have covered that story elsewhere many times.
So in 2007 he slammed the brakes on Fed balance sheet growth. Amazingly, the timing could not have been worse, as the Great Housing Bubble had already begun to deflate. A blunder of that magnitude could not have been predicted from anything Bernanke had said or done in the past. Apparently Bernanke had never understood that if you cut the Primary Dealers off from the funding and certainty of regular Fed purchases and overnight lending, you kill the goose that lays Wall Street’s golden egg.
So he did something draconian, stupid, completely out of character for him, and completely opposed to the past policy path. It was the most momentous blunder in the history of Fed serial blunders because it triggered the stock market crash of 2008. That required an even bigger policy reversal in late 2008 and early 2009, which was to institute QE, the money printing policy that was expected of Bernanke. By then he was 2 years into his policy term, during which time he had done nothing that could be considered consistent with his history. And the stock market cratered during that time.
This brings us to the esteemed “Jay” Powell. I wrote what I knew about him in my tongue-in-cheek piece on the Fed Chair horserace a few weeks ago.
Don’t Let Powell Distract You – Do This Instead
I don’t know any more about Powell today than I knew a month ago. I don’t want to know any more. The only thing I care about is what policy changes he makes, and I only care about them when he makes them. We know from history that new Fed chairs give the required deference to the policy set by the old Fed Chair. From the headlines I’ve seen about Powell, he seems like the cautious type who plays the inside game really well. He seems likely to follow tradition and not rock the boat, at least until he has a real reason too.
The good news maybe is that he apparently didn’t write any term papers on Fed policy while he was in elementary school like Bernanke did. Since he never held a do-nothing job in academia, there’s no record of delusional theoretical pronouncements like the ones that Bernanke became famous for.
That’s all good. Because we shouldn’t care about, nor think about, nor speculate about that stuff. It’s garbage designed to take your eyes off the prize. We need to stay focused on what’s happenin’ now, baby! Follow the money. Follow the current flows. Know the known policy for future flows. That policy is going to stick around for awhile.
They may call it “normalization” but that policy will actually suck money out of the banking system. There’s little reported CPI inflation, so the real reason the Fed is doing this is to prick these massive asset bubbles. Yellen has set that course. Powell will follow it until something big goes awry.
We don’t need to look past the horizon. The Fed is draining. It is pulling the punchbowl. It wants the stock market bubble to deflate. “Don’t fight the Fed!” is all you need to know.
On that basis, I’m sticking to my policy! That is to sell stocks systematically, a little at a time with the goal of raising a 60-70% cushion of cash in my portfolio by January. That will provide at least some protection against the decline that’s likely to come as the Fed increases its draining operations and the ECB drastically cuts its securities purchases, both of which occur in January. Additional increases in Fed draining will follow in April, July, and October. That’s sure to pressure the stock and bond markets.
As for who Jay Powell is and what he thinks, I don’t care, and I don’t want you to care either. It doesn’t matter. He will only make changes when conditions dictate. We’ll cross that bridge when we come to it.